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If you are worried about the Fed following other major central banks by adopting negative interest rates, rest easy. Not only is the Chairman and the FOMC not inclined to do so; they cannot do so under current procedures for conducting monetary policy.

During the period of super low interest rates and quantitative easing, banks accumulated large amounts of excess reserves. This may have been encouraged at the margin by the payment of a quarter point interest rate on reserves, under new authority granted by Congress in 2008. Given the huge quantity of excess reserves in the banking system, the FOMC decided it couldn’t nudge the Federal Funds rate the old fashioned way, by buying or selling Treasury securities in the open market. Instead, they devised a procedure whereby the Federal Funds rate would stay between the deposit rate on reserves on the one hand and the reverse repo rate on the other hand.

When the Fed made its move in December, it raised its deposit rate from a quarter point to a half point, to provide the upper limit to the Funds rate. The next move, whenever it comes, will involve a further increase in the deposit rate, likely to three quarters percent. This procedure for conducting monetary policy requires a positive deposit rate rather than a negative rate as adopted by Japan, the ECB, and other European central banks.

While I have always been in favor, on fairness grounds, of the payment of interest on banks’ reserve deposits at the Fed, the timing of their adoption may have had adverse unintended consequences. Fed purchases of securities in large quantities did provide some expansion of money and credit growth, but not nearly as much as expected. Their impact was blunted by the banks’ not fully utilizing their new excess reserves to expand loans and investments. I wouldn’t have thought that 25 basis points would have made much difference in banks behavior, and I’m still not sure whether it made a significant difference or whether it was all due to fear and uncertainty under the crisis circumstances and its aftermath. In any case, the positive deposit rate probably made at least a minor contribution to the unhelpful accumulation of excess reserves.

While I’m not a fan of negative interest rates, the adoption of negative deposit rates by the ECB, the Bank of Japan, and others, does provide some disincentive for holding excess reserves and may encourage more lending and investing at the margin. If so, those quantitative easing programs may prove to be more successful in stimulating their economies than ours was.

The point is, however, that even though negative deposit rates might help stimulate bank lending and investing, the Fed’s new monetary policy procedures preclude negative rates for the foreseeable future. Whether that is a good thing or not is not certain.